About 10 staff and customers are being held at gunpoint inside the cafe.

"This is obviously a deeply concerning incident but all Australians should be reassured that our law enforcement and security agencies are well trained and equipped and are responding in a thorough and professional manner," Mr Abbott said.

He said he had spoken to NSW Premier Mike Baird and "offered him all possible Commonwealth support and assistance".

In September, the government raised Australia's terror threat from medium to high, meaning an attack on home soil was considered "likely".

At the time, Prime Minister Tony Abbott said security agencies had not detected any particular plots but the raised alert level meant there were people in Australia with the "intent and capability" to carry out a terror attack.

Mr Abbott said at the time it would "not make any difference to daily life" for the vast majority of Australians but it would mean "more security" at airports, ports, military bases, public buildings and large public events.

"Normal life in Australia can and must go on," he said.

"High" is the second highest threat level on the public alert system.

The highest is "extreme" which means an attack is imminent or has occurred.

There is no indication the Martin Place incident is a terrorist attack.

The Mid-Year Economic and Fiscal Outlook was scheduled for release at 12.30pm on Monday but will now be released at a later time after the government swung its attention to the dangerous situation unfoldng in Martin Place.

The statement had been foreshadowed to outline a serious write-down in Commonwealth revenue forcing the Abbott government into the same situation it had criticised the previous Labor government for.